Potential Breakout Imminent for the USDJPY

Following USDJPY’s meteoric rise since January 2021, the pair is now consolidating and has traded in a narrower range for the past two weeks. The US Dollar Index (DXY) which gauges the strength of the greenback against a basket of rival currencies recently shot up to a near 20-year high at 106.79. Similar to other currency pairs, USDJPY is heavily influenced by the US dollar. The main theme that drives the greenback higher against the Japanese Yen is the diverging monetary policy stances between the two countries. 

Downbeat Japanese economic data weighs on Yen

Amid the rising interest rates environment as the world battles soaring inflation from the strong economic rebound, Japan’s economy continues to suffer slow growth which has caused Bank Of Japan (BOJ) to maintain its dovish stance. Last Friday, a series of economic data reports showed that despite the accommodative monetary policy, consumers purchasing trends are still weak. In June, the Tokyo Consumer Price Index (CPI), excluding food and energy, declined by 0.1% as compared to a year ago. The results were lower than the previous month’s data and market consensus of 0.9% increase. The CPI is a significant gauge of the purchasing trend changes and the exclusion of food and energy helps paint a clearer picture.

Weaker-than-expected labour market

Moreover, Japan’s unemployment rate in May also disappointed markets with a 2.6% reading, lower than April’s data and expected data at 2.5%. A higher percentage indicates weakness in the labour market, which negatively affects the strength and direction of the Japanese economy.

The subdued inflation and downbeat employment data would typically be bearish for the Japanese yen. In addition, the dismal outlook on the economy would only discourage and reduce the chances of the BOJ shifting away from its dovish monetary policy stance. The combination of these factors would provide headwinds for the Japanese yen, while bolstering the USDJPY pair.

Technical Analysis

USDJPY is consolidating in a symmetrical triangle after a strong bounce on 17 June. The immediate technical outlook for the pair is neutral, as it is conditioned on the price’s movement below or above the symmetrical triangle. Signs that suggest a bullish bias is that the prices are finding support above the 20 exponential moving average (20 EMA) which keeps the pair on a healthy uptrend. On the other hand, a bearish divergence on Relative Strength Index (RSI) signals that bullish momentum is waning.

Looking ahead, the immediate support the pair faces are the 2002 high at 135.19 (S1), and the 20 EMA. In the event the pair breaks out from the symmetrical triangle, the pair could head to test 137 (R1).

Wednesday, July 6

USD – Fed’s Williams speech, S&P Global Composite PMI (Jun), S&P Global Services PMI (Jun), ISM Services Employment Index (Jun), ISM Services New Orders Index (Jun), ISM Services PMI (Jun), ISM Services Prices Paid (Jun)

Thursday, July 7

USD – FOMC Minutes, ADP Employment Change (Jun), Goods and Services Trade Balance (May), Initial Jobless Claims (Jul 1), Initial Jobless Claims 4-week average (Jul 1)

Friday, July 8

USD – Fed’s Bullard speech, Fed’s Waller speech, Average Hourly Earnings (MoM)(YoY)(Jun), Labor Force Participation Rate(Jun), Nonfarm Payrolls(Jun), U6 Underemployment Rate(Jun), Unemployment Rate(Jun), Fed’s Williams speech

JPY – Overall Household Spending (YoY)(May), Current Account n.s.a.(May)